This research investigates how remuneration structures in supervisory and internal control functions affect bank behaviour during periods of systemic stress, using the COVID-19 shock (2019–2020) as a quasi-experimental setting. Unlike executive or risk-taking roles, supervisory and control functions are explicitly designed to uphold prudential oversight and limit opportunistic behaviour. However, compensation practices in these roles have received limited empirical scrutiny, particularly in terms of how they perform under crisis conditions.
Drawing on a panel of other systemically important credit institutions (O-SIIs) operating under a harmonized regulatory framework, the analysis applies fixed-effects and continuous difference-in-differences (DiD) models to measure the effects of five key remuneration components: fixed pay, variable-to-fixed ratios, deferred remuneration, instrument-based pay (e.g., equity), and clawback mechanisms. Outcomes of interest include bank-level risk-taking (Loan-to-Deposit Ratio) and profitability (Return on Assets).
The results reveal notable misalignments between regulatory intent and actual incentive effects. Both fixed and variable pay were associated with elevated risk-taking before the COVID-19 shock, while variable pay continued to increase risk and reduce profitability in the post-crisis period. Ex post governance tools, such as deferrals and clawbacks, demonstrated limited effectiveness in moderating these effects. By contrast, equity-based remuneration was more consistently associated with risk-reducing behavior, though its impact on profitability was mixed.
By focusing on governance players traditionally seen as neutral or risk-averse, this study provides novel empirical evidence on how remuneration design influences behaviours in governance roles during crisis. The findings suggest that regulatory frameworks must go beyond formal compliance and account for the behavioural realities of incentive design—particularly under systemic stress. The study contributes to the law and economics literature on corporate governance and financial regulation by linking the enforceability and design of remuneration policies to observed bank behaviours during a real-world crisis.
